Financial markets price the future. About a year ago, the market was looking for an aggressive reversal of interest rates, reflecting the turmoil in the US banking system and the expectation of an economic slowdown.
Six months ago, amid a very resilient US economy, the narrative was about "higher for longer", which was reversed three months ago to moderate interest rate cuts, before flipping back currently to two cuts or less, as reflected in the latest fed fund rate pricing.
The April US employment report showed fewer job gains, moderate earnings growth and slightly higher unemployment. The US labour market is finally cooling, delivering some evidence that demand and inflation will slow later this year. The jobs report comes as a welcome reality check after equities had been mostly dealing with the negative fallout of the geopolitical crisis in the Middle East and "higher for longer" rate fears.
On a positive note, any perceivable investor euphoria in financial markets after the end of the first quarter of 2024 has now moderated. This column argued at the time that overconfident investors would not trigger a correction per se, absent any fundamental shocks.
However, the two hotspots mentioned above (geopolitics and interest rates) took care of that and pushed sentiment to the basement, with some risk assets flashing oversold readings as of the end of April.
The textbook pattern from here onwards would be for some sizeable rebound in equities before another major risk event proves the resilience of the current bull market. With a US recession highly unlikely and leading indicators pointing to a resumption of the disinflation trend later this year, both the economy and markets appear healthy enough to withstand the impact of higher interest rates for longer.
On the topic of health, the mega-trend of an ageing population presents investment opportunities based on the rise of associated chronic diseases and the changing consumer preference for a longer, healthier lifestyle.
Ageing is an irrevocable biological process, but this has not stopped some researchers from delving into the science of longevity. Is there a limit to extending the average maximum lifespan of mankind? Whether humans can live to 120 or beyond, the tide of demographic change and its impact on society is a reality that cannot be ignored.
As a defensive, non-cyclical sector that is normally resilient to economic downturns, the long-term prospects for healthcare should remain bright.
According to the World Health Organization, healthcare spending globally is expected to constitute an increasing share of national GDP in the near future.
Although high-income economies should continue to dedicate a greater share of their GDP to healthcare, lower-income countries -- especially those in the middle income bracket -- should see a dramatic rise in healthcare spending because of population ageing.
PHARMA DEMAND TO GROW
Over the longer term, the biopharmaceutical industry has further growth potential due to demographic trends. Demand for healthcare and pharmaceuticals is likely to increase alongside an ageing population.
Furthermore, the industry's focus on R&D is expected to drive growth in the future, as witnessed by the revolutionary scale of innovation over the past decade related to breakthroughs in immuno-oncology, multi-target antibodies, mRNA-based vaccines, patient-tailored cell therapies, and the first novel gene therapies, all of which raise hopes of a more fundamental treatment of diseases.
More recently, the approval of a new class of drugs for the treatment of diabetes and obesity has revived discussions about their long-term impact on personal well-being and industries beyond the realm of healthcare.
Originally approved for diabetes, the new class of medications called glucagon-like peptide 1 receptor agonists (GLP-1) has grabbed international news headlines for their ability to help people control their blood sugar and lose weight, thereby lowering the risk for cardiovascular disorders and strokes, while reducing scarring and inflammation caused by non-alcoholic fatty diseases.
The success of the anti-obesity drugs is related to the relentless march of global weight gain. The World Obesity Federation estimates the number of overweight individuals will rise from 2.6 billion in 2020 to 4 billion by 2035. The number of obese people will grow from 980 million to 2 billion in the same period.
US MARKET PROMISING
The drugs' popularity has also been driven by transformative weight loss experiences documented on widespread social media platforms.
Demand is supported by the establishment of affordable insurance coverage in the US, where more than 70% of the population is estimated to be overweight or obese. The two key players, Eli Lilly and Novo Nordisk, are expected to expand their drug capacity through capital expenditure of close to $30 billion by 2026.
The global obesity market should still see significant supply shortages in the next three years and beyond, as new competitors will not be able to enter the market until 2028. The prospects for the weight loss market therefore remain bright.
We hold a constructive view on the healthy living theme, not least because valuations across the theme remain attractive. Potential short-term setbacks should be used to increase exposure to related investments.
Kean Tan is head of investment solutions at SCB-Julius Baer Securities Co Ltd
